JERICHO OIL | Drilling in the Lowest Cost Play

TRANSCRIPT

Maurice Jackson:

Welcome to Proven & Probable where we focus on metals, mining and more. I'm your host, Maurice Jackson. Today we will highlight Jericho Oil, a world-class, upstream oil and gas company. Joining us today is Brian Williamson. He is the CEO of Jericho Oil. Mr. Williamson, welcome to the show, sir.

Brian W.:

Good afternoon, Maurice. How are you?

Maurice Jackson:

Doing well, sir. For first time listeners, please share, who is Jericho Oil and what is the thesis you're attempting to prove?

Brian W.:

Jericho Oil is a TSX Venture listed Canadian oil and gas company. Our focus is on acquiring and developing assets in North America, specially Oklahoma, which is the mid-con region of the United States. For the last three and a half years we have been head down buying assets from all kinds of unique capital situations for our shareholders.

The Anadarko Basin is a pretty special place in the oil and gas world. It's been developed for a hundred plus years now. It's produced five billion barrels of oil and if you think about that time horizon, you've seen all kinds of development. You've seen your classic drill and flow wells. You've seen your vertical development. You've seen your single section horizontals. What the Anadarko hadn't seen up until very recent years is a multi-stack development opportunity that exists with all the benches that are in it, so every bench has been developed at sometime in its life in the Anadarko, but never all of them at one time and with new technology and the new techniques, we're able to develop single sections in multiple benches, which is the whole premise behind the STACK, which is a part of the Anadarko Super Basin.

Maurice Jackson:

For our listeners, the value proposition that immediately caught my attention regarding Jericho Oil is the market entry point and that you're option value oriented. Brain, can you expand on that option value that I'm referring to?

Brian W.:

Yeah, so one thing to think about when you're an oil and gas person is not always about what is the producing asset value, but what is the long-term value of the asset. What can you do with this asset at different price intervals?

Our thesis in buying assets was to look at things that had HBP production and that production is important because when you're in a downturn, which we were for the last three plus years. You never know when you're going to get a price to drill, so the acreage that is held by production the placeholder that is productive and in most cases, you're going to be able to break even or make a little bit of money on it.

The reality is, is that the asset has to have upside. Upside being, what can do with it if I get a price to drill? In our world and in our mind, we think of as $60, $55-$60 as a drilling price, so in today's market all of a sudden, we see ourselves ready to take advantage of that optionality. For us, it's been head down, buy at the distressed, producing assets that had really interesting rocks that hadn't been developed to their full potential for one reason or another and hold 'em and wait til we got the price to drill.

You've seen the market grow out of that distressed world. You've seen most of that debt flushed down and balance sheets are pretty healthy in the oil and gas business and we think it's a time to drill and take advantage of that optionality.

Maurice Jackson:

Now, correct me if I'm wrong, but Jericho Oil raised more than 45 million dollars Canadian to purchase, I believe, what, 70,000 acres and you're already producing 450 barrels per day here. This was all accomplished through non-brokered. I want to emphasize this for our listeners. Non-brokered private placements during the oil market downturn. That's quite impressive. How were you able to achieve this accomplishment and who were the key check writers?

Brian W.:

So for us, the goal has been this is ... We say the downturn as a crisis and it was a crisis in the oil and gas world and so, our thesis and our main shareholder's thesis is, we never want to waste a good crisis. A lot of that steams from the Breen family, which is one of our largest shareholders, the patriarch being Ed Breen, the chairman and CEO of ... excuse me, the CEO of Dow DuPont, former chairman of Tyco and CEO of Tyco.

Ed's theory was, is that it's one thing for people to say they like to buy low and sell high, but buying low is not easy because not only is the price against you, but you're also dealing with the prevailing headwind. In oil and gas, when prices go lower, all the TV is littered with is people telling you why prices are going to go even lower and so, the natural reaction is, why do I want to get in a business that's going lower?

But, the reality is, is that things will recover. Things will get better. We didn't necessarily know when. We didn't know if it would be a year or two, five years from now, but our thesis was is that prices will recover. The world can't survive on $30 oil. There's a huge gap between being profitable and being ... losing money at 30 and making money at 60, so our idea was, when we saw the prices at that level, keep buying, keep our head down and that was Ed's advice and the Breen family's been one of our largest shareholders.

But, we've heard the same comment. If you look at our shareholders, you have the Belzberg family, another long-time oil and gas investor family. They've been in and out of the business for ... I think Sam's been in it for 50 years, 60 years. You have the Graves Family. You have the Hagna family and they all are entrepreneurial in the sense that they understand that world and they understand what it takes to buy things cheap.

It's easy to buy something at $150 oil because the numbers you're looking at look rosy. They look fantastic because all you're showing is profit, profit, profit, but you're also paying max price and so, the investor's psychology is, it's the same thing if I showed you a mutual fund. If I showed you the last three years return on mutual funds, it's up 20%, 30% and 30%. Geez, that guy's a genius. He should buy his fund.

Well, if I said it you logically, well you're going to buy it high or if I showed you another fund and he lost 20%, he lost 30%, he lost 30% and he said, "Geez, this guy's terrible. Why am I buying his fund? He loses money every year." Well, you're buying low. It's the same thing in our world, right? The assets are the same.

Just because oil prices are low doesn't mean it's a bad asset. Doesn't mean that the team that owned it was a bad team. We bought from great teams, really smart teams. It's just, when prices go against you in a commodity business, it's a tough world.

Maurice Jackson:

I just have to share again with our listeners, I truly believe in the value proposition of Jericho Oil for the virtues we're going to convey in today's message. Brian, you've provided us with a historical context of Jericho Oil. Let's fast forward to 2018. The drills are now turning for Jericho Oil in the prolific STACK, which is in the Anadarko Basin. Two-fold question, what is the value proposition in the STACK and how does Jericho plan to acquire assets within the STACK?

Brian W.:

The STACK is the epitome of modern oil and gas, so you take the same area that's been developed vertically at different benches at different times in life and the STACK offers you the unique opportunity to take that same space, that same single section and not only drill one well, but drill 10 horizontal wells.

We're conservative in saying that we think you can drain a section with 10 horizontal well, but if you think about that, that's five million barrels of oil. Half a million barrel per well, 10 wells per section, it's five million per section. That's the game changer in the oil and gas business is the ability to drain a section that was already deemed drained when it was drilled vertically, so to us, that's what makes the STACK so unique.

You have 700 feet, 1,000 feet of pay. Multiple formations, good seals, so the ability to drill multiple horizontals in the same landing area, so to me, that's what makes the STACK unique. For us, two formations. The Meramec, which the upper part of the STACK and the lower part is the Osage.

The Meramec is something that we think is pretty interesting on the Western component of our acreage and the Osage is prevalent throughout everywhere on our acreage. Our goal will be too, basically prove up both components in our acreage. We have a price to do it now, Maurice.

When we bought our acreage, oil was $40-ish a barrel, but it's all HBP, so we had time to wait. We've been head down for the last four months, cleaning up our title to get everything ready from a lands perspective to develop our acreage and now, we see ourselves moving forward with the development plan in 2018.

Maurice Jackson:

What is the break-even cost on your oil, there? Is it $32, if I'm not mistaken?

Brian W.:

Yeah, it's about $30-$32, Maurice. It's a really good point. It's one of the lowest, if not the lowest break even in North America.

Maurice Jackson:

Quite impressive. Who are some of the prominent operates in the STACK?

Brian W.:

For us, we are surrounded by all the big guys. You have your Continental. You have Devons. You have Marathon. You have Newfield. You have Chaparral. You have newly public Alta Mesa. We are the only junior sitting in between all these big guys.It's kind of a nice position for us because we get to do what we call, tuck-in acquisitions, Maurice, that would be meaningless to Continental. 1,500 acres is meaningless to Continental, but to Jericho, picking up 1,500 acres that is contiguous is three more operated sections in our mix and so, things that show up on the market where there's very little competition from the big guys, we can add to our mix as little tuck-in acquisitions on our 10,000 acre position, so we find that to be a pretty amble position.

Maurice Jackson:

Now, let's summarize this for our audience and please correct me if I'm wrong. To confirm, Jericho now has about 11,000 acres in the STACK with a potential of about 100 million barrels of oil with a break-even price of $32 and you purchased the acres at 80 to 90% discount surrounded by some of the most prominent operators and Jericho now has about 160 locations within the STACK, is that correct?

Brian W.:

Yes. All of those things are spot on. I think our evaluation was a little lucky. At the end of the day, we always look to be opportunistic, but it's always nice to be a little lucky.

About four weeks after we closed our package and our first acquisition in the STACK, or neighbor Alta Mesa went public and they were bought by Silver Run, which is a SPAC run by Jim Hackett for 17 plus thousand dollars an acre.

Our initial entry price is $2,300 an acre, so you can imagine our excitement as a team when we saw where they went for and they are world case, no doubt about it that they are one of the best operators in the play. I think one of the things you'll find this STACK and in the oil business in general is, is that everybody roots for everybody because you want good wells, you want good results.

I know that we root for Alta Mesa to drill good wells. We root for the small ... the other large guys. The Marathons, the Continentals, the Devons, 'cause it only goes further to prove the play out and we think that play's pretty special.

Maurice Jackson:

What is the ratio of PDPs versus NPDPs?

Brian W.:

Our acreage is, is all PDP. It's all held by production, but the production that holds it, really is only a very, very small percentage of what we think of the potential is, so I would probably say that our undeveloped acreage will vastly ... it's vastly greater than our developed acreage. We just haven't had a chance to put the drill bit to the ground yet. I mean, we just got done with the acquisition. You're going to see most of it is not proven at this point.

Maurice Jackson:

Alright, and do we know anything about the average decline rates?

Brian W.:

The decline rates of kind of an interesting question, Maurice, because you're going to see ... We think you're going to be able to deliver a 1.2 B factor. That basically looks like about a 90% decline from initial production over the first year. What the focus is on for us as a team and for other operators is maintaining a higher oil cut. That all goes back at how you flow back the well.

The original marketing idea was to give you ... open the well wide open, don't choke it back at all and give yourself the highest single day IP possible and that would deliver an enormous number, but that also had an impact on the well's transition from being a liquid well to more of a gassy well and so, what you really want to focus on now is, you do want to look at that IP, it's still important over a 30 day period, but you really want to look at 30, 60, 90 and also look at, have they maintained the oil cut because oil is 60 and gas is less than three dollars a barrel.

The reality is, to me, what we want is focus on the 90 day number, focus on the 180 day number, but we think you're going to see your typical 1.2 B factor decline curve there.

Maurice Jackson:

Now, Brain, Jericho Oil's primary focus will be the prolific STACK, but Jericho Oil has two more plays that will provide additional value to the company. Let's discuss Jericho Oil's Sure play. Provide us with some background on the Sure.

Brian W.:

Yeah, so the Sure play is really sort of illustrative of our strategies. We bought this on New Year's Eve, December ... New Year's Eve, 2015. If you remember the oil market, it was $27 a barrel. Prices were down a dollar every day for the month of December it felt like. It was a bad time and this was a pretty interesting asset. It had Woodford Development in it. It had Hunton Development in it. Those are two fairly prolific formations in Oklahoma, particularly as it relates to that central Oklahoma area.

Some good results, good engineering, good team, just tough capital structure, tough market, so it had an opportunity to pick up the asset and we thought that the opportunity was too good to pass up. Again, good HBP to acreage position. Good geology. Good engineering data and we felt like we could hold on to the asset and put ourselves in a position where when prices came back that we'd have a chance to develop it and here we are testing the Woodford now, looking at it. We're not doing the heavy lifting there, Maurice, because we're not as big as some of our neighbors and this is another scenario where we have a neighbor, BP, who are drilling two mile laterals, so for us, we'll test it vertically, but the play is pretty interesting and it's a really nice cash flowing asset for us.

Maurice Jackson:

What are the plans for the Sure play?

Brian W.:

We'll test the Woodford. We think the Woodford's pretty interesting there. There's been three or four tests of it there. It is definitely oily. It is definitely productive. It is going to be in our production and development mix, it's just a matter of timing. Timing in the oil and gas business is something that people are, in our opinion, missing.

There's this whole notion out there that U.S. Shell is going to overtake the market. Services are constrained. There is a service issue and getting access to services is challenging, so you have to pick and chose where you're going to utilize those services because there's not an endless supply right now.

Maurice Jackson:

Alright, let's discuss the third project in your portfolio and that's the Osage extension. What can you share with us there?

Brian W.:

This one is one that's sort of was a sleeper. We bought this almost at the same time we bought the Sure play. This asset has more disposable capacity than just about anything we've seen in a long time in Oklahoma. We have a tremendous infrastructure in place, pads in place, great title work, 80,000 barrels of infrastructure and at the time, several wells that were top of the class in terms of their IPs and their production. It's just that as this asset was coming on, the markets were cratering and so, you had a situation where nobody cared. Nobody paid attention to it, but the fascinating is now that the market is back, everybody's interested in the Cayne and Mayes and this is a really ... this is like prime real estate for that, so it's an area that's really old. It's been developed, so the title work is probably as valuable as anything there because it'll take you millions and millions and millions of dollars to replicate that title work that came with that asset, so we're pretty excited about that and that's also something that we'll look to test and develop later this year.

Maurice Jackson:

Okay, that was my next question, what is the goal on the Osage Play?

Brian W.:

Yeah, so I think our goal there was, we'll probably look for a drilling partner and bring a drilling partner on to help us develop that. We think it makes sense for that 'cause we have everything. We have all the infrastructure in place, so we think it's a really interesting opportunity to bring in a drill partner.

Maurice Jackson:

Switching gears. Brian, we've discussed the tangible assets, but I'm of the opinion that the best value propositions must equals their tangible with their intangibles. Jericho just completed two joint ventures regarding intellectual data. Please share the details.

Brian W.:

I said this earlier in the call, we like data and we root for our neighbors and so, if we can create co-operation and we're learning from other people, learning what they've learned that doesn't work, learning what works, where to land, how they frack, what worked, what didn't, it only makes our wells better.

The idea was, we have neighbors who are fantastic operators, so one is Staghorn Petroleum. They had the most successful exit in the STACK to date. They're back into play. They love it so much and they're our neighbor to the west and we've been working on developing the Meramec together over there in the west and we think that was a great fit for us.

The other's another group that is focused on the Osage, which is the other component of the STACK. Really good team and we thought putting our heads together and developing that, initially made a lot of sense because we get the opportunity to work with them on their acreage and then bring all that knowledge back to our acreage.

Maurice Jackson:

I learned from Rick Rule and Doug Casey that the people running the business are equally if not more important then the latent material in the ground. Mr. Williamson, please introduce to us your board directors and what unique skill sets they bring to Jericho Oil.

Brian W.:

I think the biggest thing you'll see as I run down our board is that they are very experienced, so you get that sage like wisdom when you think about the board. You have Nick Baxter, who is a 30-40 year oil and gas veteran. Been very successful at the business, really understands it, asks really good through provoking questions.

You have Markus Seywerd. He's ... He runs ... He's a chief investment officer for Park Lane hedge fund and he's also a geologist by training, so he really understands the rock, but he also understands the economics side of developing assets.

They bring that technical experience. You have Allen Wilson, who is also board of director and our founder who brings 20 years of junior market experience. Never been in the junior markets, I can tell you that what he brings in terms of market knowledge and how to navigate them, separates us from lots of other juniors. The other board member being Gerald Tuskey. Gerrald is a corporate attorney who brings 30 years of Canadian securities experience, so you have a really good mix of experience, really good blend of skills and all sort of shareholders of the company, as well.

Maurice Jackson:

Tell us about Brain Williamson. What makes him qualified for the task at hand?

Brian W.:

For me, public markets are a new place for me, but I've been doing what we're doing now for almost 20 years. I have a legal background. I have a finance background. I have a CPA, so I understand the business side. For me, I've grown up now looking, evaluating, operating oil assets in various capacities and this was not a new opportunity in terms of how to build an oil company, what was new was doing it in the public forum for me.

I looked at the team we had that had been doing it with me for a while and they came along. We have Ryan and Tony and Allen and I have known each other for a long time and what you'll see that we've added to that is the science. I'm a believer in understanding the science that is in your portfolio and having folks with experience at it and so for me, it was assembling a technical team that had not only experience in developing the rocks that we're focused on, but doing it together.

If you look at our geology and engineering team, Shane and Dennis leading those two efforts, they've drilled 30 horizontal wells, from chalkboard to drill bit together and that's important to work hand-in-glove. There's no finger pointing. It's a team-oriented approach. These guys have been doing it for a long time. They've been doing it right here in the Anadarko. They've been doing it in Oklahoma, drilling Osage wells, so you get all that knowledge and experience. You don't have on the job training with them. They hit the ground running.

For me, it's having the opportunity to assemble that team that's the most exciting part of this.

Maurice Jackson:

Well, you hit the nail on the head on my next question I was going to inquire about, your technical team, but I believe you've already covered that for us.

Brian W.:

Alright, thanks.

Maurice Jackson:

Next question here for you, let's talk some numbers. How much cash or cash equivalence does Jericho Oil have?

Brian W.:

We're sitting on about 4.5 million dollars of cash. We have a credit facility with East West Bank that has about 7 million dollars of availability in it. As you pointed out earlier, Maurice, we see ourselves as ... We expect to spend that money. We expect to drill. We do have plans to drill, assuming the oil prices hold up, we'll look to do that later this year. If we need to raise money, we will raise money. That's not been our challenge.

Maurice Jackson:

Talk to us about your cash flow distribution. What is the ratio between cash spent and tangible assets on the balance sheet.

Brian W.:

That's something that we'll get into more as release our year end financials. We're a little too close to getting that done, so we can save that for our post financials coming out.

Maurice Jackson:

How much debt do you have?

Brian W.:

We have a facility with East West Bank. That facility is a $30 million facility. $12 million borrowing base and we have outstanding about 5.8 million on it now.

Maurice Jackson:

What is your burn rate?

Brian W.:

It's zero.

Maurice Jackson:

Talk to us about your share structure.

Brian W.:

Pretty simple share structure. We have one class of shares. We have common shares. We have about 126 million shares outstanding. We have seven million options and 26 million warrants. The warrants are at 60 cents and they come due over the next year to 18 months. Some might be a little longer then that.

Maurice Jackson:

Are there any change of control fees?

Brian W.:

We do not have any of those.

Maurice Jackson:

Alright. Mr. Williamson, what keeps you up at night that we don't know about?

Brian W.:

You know, I think for me, it's interesting to watch the speed at which people are refocusing on oil and gas and for us, we've been in this business for a long time, so we sort of realize there's ebbs and flows in the price cycle.

What we've seen is a lack of capital in flows in the oil and gas, so we do see that as a good and a bad thing. We see it as a good thing because we think it's going to keep pressure on prices to keep prices higher over the short to mid to long-term periods, so that's a positive. The negative being that there's still a real shortage of people who want to talk about oil and gas, so we really want to focus on it that aren't in this space.

You haven't seen the generalist world come back, look at the space to see the opportunity that is oil and gas because it's a place you can make real returns. At 50 and 60 dollars, the numbers are really inviting and you just haven't seen anybody come back. I shouldn't say anybody. You haven't seen a large majority of people come back and looking at the space.

Maurice Jackson:

Which is exactly why we're here, sir. Last question for you. What did I forget to ask?

Brian W.:

I think the question that we get asked a lot is, what is it that ... What's happening with the marketplace and why are services so constrained, 'cause for folks outside of our industry, the expectation is, is that as you're seeing businesses ramp up, services will be available and what we've noticed is the body count is really low. There is a ... It's tough to get people to come back because other parts of the economy, they've taken a new jobs, they've moved on and services are a bottleneck. That's something that we see, not just in our small Jericho world, but across the board. Getting frack spreads, getting wireline services, they're getting better, but they're still a real shortage of services in the marketplace and so, it definitely delays your ability to deliver what you feel are your timely results.

Maurice Jackson:

Brian, for somebody listening who wants to get more information regarding Jericho Oil, please share the stock symbols on the TSX and on the OTC and your contact details.

Brian W.:

Our stock trades on the TSX Venture under JCO.V and our stock trades on the OTC under JROOF. For contact details, you can reach ... We have everybody's contact information on the website, so if you can go to www.jerichooil.com. You have all of our IR, our PR and our team contact information right there.

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